Reading between the lines of Wijewardena’s critique of the IMF
Tuesday, 12 August 2014 00:01
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By Practical Economist
Under the title, ‘A Child’s Guide to the IMF’s press release on Sri Lanka,’ W.A. Wijewardena has stated that the recent IMF press release on Sri Lanka should be read ‘between the lines’ in order to obtain the true meaning of their message because their language is diplomatic towards Sri Lanka.
This is a strange contention since we all know that the IMF openly expresses direct and clear messages in their surveillance reports, and that is no different in the case of Sri Lanka as well. In that background, Wijewardena’s argument that the IMF’s Executive Board has been kind this year to issue a diplomatic and favourable report on Sri Lanka for the year 2013 is not a tenable or credible statement.
That contention however reflects Wijewardena’s acute unwillingness to accept independent reports which are favourable to Sri Lanka. His conduct, although strange, is not surprising, because since of late, Wijewardena has repeatedly shown that he is not comfortable about accepting any report produced by any institution, whenever those reports express satisfaction regarding the economic progress of Sri Lanka.
Gross misinterpretation
In the above mentioned article, Wijewardena has argued that countries with net negative exports make negative contributions to their countries’ outputs, and that such net exports make positive contributions only to the exporting countries’ output. This contention is a gross misinterpretation of basic macro-economic accounting identity that discredits the contribution of imports and exports to a country’s domestic output.
All students of economics know very well that both imports and exports make positive contributions to output in different ways. For example, any import commencing from the point of entry keeps adding value domestically until such import is consumed completely by the domestic economy, whether it is a consumption good, investment good or a raw material. Wijewardena has overlooked this domestic value addition process and has attempted to suggest that imports only contribute to increasing the output of the exporting country.
Of course, his argument will be true, if an export from an exporting country was dumped in the sea no sooner it reached the importing country! The obvious flaw of Wijewardena’s argument therefore, is that it is based on considering only one component of macroeconomic identity which is net exports, without analysing its linkage to the other two key components of the same identity, which are aggregate consumption and investment.
In contrast to Wijewardena’s theory however, the IMF has shown that the growth in Sri Lanka’s net exports has benefited the country’s output during 2013, with Sri Lanka’s exports growing at a higher rate. This positive contribution was also reflected in the sectoral contribution of GDP, where contributions from several export related sectors such as industry and certain agriculture products had increased their value addition during the year.
As is well known among economists, this is also a consistency check in GDP compilation, where the GDP as compiled using the expenditure approach (demand side) and the GDP as compiled using the sectoral contributions (supply side), should match. Wijewardena should be familiar with the two different approaches of compilation and interpretation of GDP since he is an eminent teacher of Economics, although it now seems to be increasingly evident that he sometimes misses certain basic economic theories, perhaps in his anxiety to be guided by his political stance, and not by sound economic theories.
Creating a lively debate
In one of his previous articles in response to comments from the Practical Economist, Wijewardena mentioned that even stupid arguments should be welcome, since those help to create a lively debate. In that context, it must be acknowledged that Wijewardena has made some excellent contributions to the economic discourse in recent times.
In fact, one such contribution was his submission that sovereign debt could be repaid by printing local currency as long as foreign debt is issued in local currency. If that is a valid contention, Sri Lanka’s solution would be very simple, as the Government could immediately lift the 12.5% foreign ownership restriction of the existing stock of debt, and issue more rupee denominated debt to foreign investors, and thereby replace the dollar denominated external debt with rupee denominated Government securities.
In fact, the Government could readily do that at the present time, since there is a large global demand for Sri Lankan Rupee debt. That would also be particularly convenient for the Government because the majority of external debt would then be in rupees and the Government could, if necessary, service such rupee debt without too much of a risk!
Another contribution to the lively debate by Wijewardena was his argument that remittances are first used to pay for imports when there is a trade deficit. It is however very well known that Sri Lanka has a fully convertible current account and a partially liberalised capital account, where even external debt service payments including capital payments are freely permitted.
In such a situation, when remittances are received by local banks, such proceeds could be used for any external payment, without any restriction that the inflows should be used to pay for imports only. Hence, Wijewardena should perhaps now advise himself that his contention is not tenable.
Wijewardena has also argued that when the revenue account is in deficit, borrowings are used for Government consumption, irrespective of whether such spending is to consume American bread or to be used for Government investment. In this regard, Wijewardena seems to have overlooked that the current deficit in the revenue account is now much lower than that which prevailed during the period he was responsible for providing economic advice to the Government.
He may of course, not be willing at present to appreciate the improvement in the deficit. However, it is sad that he now seems to be comfortable even if the Government spends money for people to consume American bread, and even when that means that the Government will have to deposit the debt service funds in a rupee account in the Central Bank, which, in his view, does not impact the balance of payments!
In that regard, what Wijewardena seems to have forgotten is that when a debt repayment is made to a non-resident entity such as the US Embassy in Sri Lankan Rupees, that money belongs to that non-resident entity, and they have the right to spend that money any way they prefer, locally or internationally.
What Wijewardena has also failed to realise is that if such money was not available locally to the US Embassy, it would then have to bring funds from the US for their expenditure in Sri Lanka, and that would be a foreign currency inflow into the country. Hence, the impact on the balance of payments would be exactly the same, and there would not be any additional benefit to Sri Lanka, just because the repayment was in Sri Lankan Rupees and the monies were deposited in a bank account within Sri Lanka. It may also be useful to remind Wijewardena that this is the reason that such payments are classified as an outflow in the BOP, in the compilation of the BOP.
Imminent external debt crisis warning
In the midst of this debate where, in the words of Wijewardena, even stupid arguments are welcome, another rather disturbing feature in Wijewardena’s article under reference is that he seems to be very disappointed that the IMF has not warned of an imminent external debt crisis in Sri Lanka.
Since Wijewardena has been making many recent claims that there is an “impending debt crisis” in Sri Lanka, he must be naturally annoyed with the IMF because the IMF does not seem to be endorsing his views. As a consequence, possibly to hide his embarrassment, he now seems to have taken the desperate step to echo his regular but unsustainable warning, as an IMF’s ‘between the lines’ comment.
Needless to say, by doing so, Wijewardena has sought to introduce an interpretation that the IMF has obviously never intended to convey, and therefore, no knowledgeable person would take his ‘between the lines’ comments seriously!
